EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Optimizing LED EPAct 179D Tax Deductions

Businesses are rapidly installing Low wattage Light Emitting Diode (L.E.D.)
lighting in building facilities throughout the country. A business can claim
Section 179D lighting tax deductions for qualifying low wattage installations
completed as of January 31st 2013. Therefore, the Section 179D EPAct(Energy
Policy Act of 2005) tax incentive for low wattage lighting only has three years
left which results in the 3,2,1 count down for those property owners who want
to utilize the tax incentive. Businesses owning or leasing buildings and
particularly multi property owners should be planning their 3 2 1 L.E.D.
lighting installation count down.

LED Lighting Countdown Schedule

Count down Remaining EPAct Years

3 2011

2 2012

1 2013

The lighting industry is quickly moving to LED lighting for almost all
mainstream building lighting applications. All of the major lighting
manufacturers and numerous start ups are rushing in to meet the burgeoning
market demand. Like any new major product innovation, there are positive and
negative aspects to this massive level of technology change. Some of the
positive aspects of LED lighting are very low wattage, the resulting ongoing
energy costs, long lamp life, hence reduced replacement and maintenance costs,
and zero mercury content. The Department of Energy estimates that widespread
introduction of LED's could save 260 billion in U.S. energy costs, remove the
need to build 40 new power plants and cut lighting demand for lighting
electricity by more than 30 percent. Heretofore, some of the major LED
negatives have been high initial product cost and consistent performance. On
the cost side the good news is that price points are declining, the energy
savings, replacement costs and maintenance costs previously described are
material and EPAct tax savings and utility rebates reduce the upfront costs.
LED product performance issues are being addressed by the industry and
warranties can be utilized to mitigate performance risk concerns.

The Section 179D Tax Provisions

Pursuant to Section 179D and its underlying ASHRAE (American Society of
Heating Refrigeration and Air Conditioning) building energy code, commercial
buildings are eligible for energy efficiency tax deductions of up to $1.80 per
square foot. If a building’s energy reducing investment doesn't qualify
for the full $1.80 per square foot deduction, deductions are available for any
of the three major sub-systems, including:

1. Lighting

2. HVAC (Heating, Ventilation and Air Conditioning) and

3. The building envelope

Each component can qualify for up to 60 cents per square foot EPAct tax
deductions. The building envelope is anything on the perimeter of the building
that touches the outside world including roof, walls, windows, doors the
foundation and related insulation layers.

Rapid Product Introduction

For building interiors, the first major building category to move to LED's
was parking garages.1 Electricity costs for lighting is essentially the
exclusive energy cost for garages which often have high electricity costs due
to 24 hour operation often required for security purposes. Now we are seeing
the LED market quickly expand to retail, hotels and restaurants, where a better
higher price point, lighting source is more easily economically justified. 2,3
The lighting industry is now poised for broad based expansion into the office
building, industrial and warehouse markets making the 3,2,1 EPAct tax deduction
countdown crucial.

As indicated in a recent L.E.D. magazine article, “Dramatic
improvements in commercially available LED performance in recent years, as well
as significant cost reduction, has made it feasible to design LED lamps to
offer comparable lumen output and to compete with other established lighting
technologies on the basis of cost of ownership.4” The L.E.D. Industry has
some major nationwide initiatives to accelerate L.E.D. installations. The LED
University™ is working with universities to save energy, reduce
maintenance costs and expand L.E.D.’s “across the full range of
campus infrastructure.”5 Similarly, the Cree LED City program is “
…reducing energy use for lighting by 50-80% and realizing maintenance
savings that can reach six figures…”6

Utility Rebate Planning

More and more utilities are recognizing the benefits of LED technology. For
example the two major Connecticut utilities, namely United Illuminating and
Connecticut Power are currently offering up to a 50% rebate for LED lighting
installations.

Most utilities with rebate programs have prescriptive rebates and some may
offer custom rebates. Prescriptive rebates provide a prescribed rebate for a
particular type of lamp or lighting fixture technology.

Prescriptive rebates are quite common with mature technologies like
fluorescent lighting where the utility knows with a high degree of certainty,
what the resulting wattage and product performance is going to be. With new
technologies, including such technologies as LED lighting, utilities sometimes
provide so called custom rebates that are customized to the expected
performance of the specific project. Customized rebates for electricity
reducing products are frequently called kW rebates because they are based on
the actual amount of electricity reduction which is called kW reduction. If a
utility offers both prescriptive and kW rebates a calculation should be
performed to determine which utility rebate alternative produces the best
result.

T-12's are one of the most widely utilized lamps and can be found in many
existing buildings, merchandise display cases, and numerous other applications.
Pursuant to the Energy Policy Act of 2005, ballast manufacturers cannot
manufacture T-12 magnetic ballasts after July 1, 2010. T-12 lamps are very high
energy users compared to today's lighting products. The number in a fluorescent
lamp description describes the number of eights of inches in the lamps
diameter. Hence a T-12 lamp is an inch and one half and T-8 is an inch in
diameter. Companies with large purchases of T-12 replacement lamps should begin
to expect price increase for future replacements. It wasn't until 2005 that the
number of T-8's sold exceeded T-12's which demonstrates that there are still a
tremendous number of existing T-12 lamps destined for replacement.

The second main stay commercial lighting product that was made illegal to
manufacture as of January 1, 2009 is a standard probe start metal halide
fixture. Pursuant to the Energy Independence and Security Act of 2007 a metal
halide lamp fixture with lamps greater than or equal to 150 watts but less than
500 watts contain must either be:

B. a minimum ballast efficiency of 90 percent for wattages of 250 watts or
less.

There are some exceptions to these rules for some specialized fixtures.

L.E.D Magazine describes the impact of the Federal Bans in this way,
“Legislation banning inefficient lamps, coupled with customer awareness
of the cost of ownership analysis, will create a strong demand for replacement
LED lamps. Market conditions are right for the LED replacement lamp market to
accelerate in the next few years, according to a new report from Strategies
Unlimited. Although the market for LED replacement lamps is still in its early
stages of development, lamp revenues are forecast to grow at a CAGR(Compound
Annual Growth Rate) of 107% through 2013.7”

New Building Energy Efficiency Benchmarking Rules

Many of the country’s major cities, including NYC, LA, and D.C., have
recently enacted public disclosure benchmarking rules, typically requiring
buildings 50,000 square feet or greater to report their building energy use
over the internet based on scheduled dates. This disclosure is intended to
inform tenants and make it obvious which properties have been managed to
accomplish energy efficiency and which have not. The recommended tax planning
strategy is to use EPAct tax incentives to retrofit to higher efficiency levels
before the mandatory disclosure date. Presumably it will be detrimental to
tenant selection and resulting property values to report an energy inferior
building. 7 Acting on the 3, 2, 1 L.E.D. countdown will enable property owners
to report much more efficient buildings.

Conclusion

There are multiple compelling reasons to convert to low wattage LED interior
lighting. A massive market conversion has begun. Tax professionals need to
realize that most low wattage LED lighting is typically eligible for large
Section 179D EPAct tax deductions and need to work closely with building
operators during the next three years to match the 3 year EPAct tax deduction
countdown period with the product driven market changes.